Discretionary trusts - settlor and beneficiary rights: under a discretionary trust, the person who owns a life policy, commonly referred to as the settlor, cedes their policy to a group of trustees, who legally own the policy until the time comes to relinquish it to the settlor's named beneficiaries.
The beneficiaries are personally decided upon by the settlor. However, it falls to the trustees to make a decision on when the beneficiaries receive their share of the trust fund, and, indeed, how much each person receives.
Under such a situation, it might seem as if the trustees retain all the power. So, what are the rights of the settlor and the beneficiaries under such an arrangement?
Settlor rights: first of all, it's important to note that it's up to the settlor to guide the trustees on how they'd like the discretionary trust to be used; the trustees can only act in a way that is allowed by the terms of the policy. The settlor can dictate his or her wishes through a written letter.
Once a settlor has placed his or her life policy into a discretionary trust, they no longer have personal legal ownership, although they must still keep up with policy premiums. The settlor is also a trustee, and, of course, is responsible for choosing both trustees and beneficiaries.
Beneficiary rights: a number of people will automatically be named in the discretionary trust as beneficiaries, including any spouses, children, grandchildren, close relatives or estate beneficiaries. The settlor can also name additional beneficiaries.
Beneficiaries actually have very few rights – in fact, none are guaranteed to receive a single penny from the policy. The only assurance provided is that trustees must act in their best interests at all times.
Unsure about whether you'd like to pursue your interest in converting your life policy into a discretionary trust? Coddan Formations Agency can offer balanced, professional advice, with no obligation to proceed with any form of financial commitment.